Acknowledgements

Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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group appears to be a unique occurrence in the history of European co-operative banks. As such it is 

evidence that local banks may actively shape their destiny and leave the group if they do not agree with the 

policies of the majority.

Even though the degree of centralization of the OP-Pohjola Group is relatively high, the impact of the 

group on the operations of local banks may still be considered relatively limited. in the OP-Pohjola Group, 

local banks make independent decisions on matters such as lending and interest rates (both lending and 

deposits) and personnel hiring. Local banks are locally governed, and their boards are appointed by local 

members following the “one person, one vote” principle. For many other products (e.g. mutual funds and 

insurance), the local banks act as agents of the group center.  Active involvement of group management in 

the activities of local banks is extremely rare and takes place only in exceptional circumstances. in this way, 

the group structure may even strengthen local-level democracy, because the local banks can be smaller and 

attain economies of scale through collaboration with the center.

 

There have been some mergers between co-operative banks. in 2000 there were 240 co-operative 

banks within the OP Group; by the summer of 2011 this number had fallen to 209. in the POP Group, the 

number of banks has been reduced through mergers from 44 to 36. in practice, the size of local banks varies 

quite a lot from very small local banks to large regional banks. This is likely to impact the effectiveness of 

local governance.

One cause for concern for co-operative banks has been the low voting activity of members. recently 

the banks in the OP-Pohjola Group have tried to address this issue by enabling voting using the internet. 

But while member mobilization is likely to be dependent in part on how active the local banks are in 

promoting member participation, it is also probably the case that most customers are not interested in bank 

governance per se and are likely to feel inadequately prepared to participate in bank governance. For most 

customers, access to reasonably priced services is their main issue they want from their local co-operative 

bank and possibilities to participate in governance are likely to be of secondary concern.

5.3 Membership motivations

Concerning the motivations of customers to become members, Jones, Jussila and Kalmi (2009) have 

found that the size of the common bond is a significant explanatory factor in accounting for differences 

in membership rates among co-op banks in Finland. This holds true both for the size of the relevant 

population (e.g. banks operating in large towns or regional banks, have smaller member to population 

ratios) and for the number of customers (bigger banks have smaller member to customer ratios).  They 

obtain this result after controlling for a number of other determinants of membership, including economic 

motivations to become members.  Emmons and Schmid (1999) report similar results for US credit unions. 

Concerning the openness of co-operatives to new members, Finnish co-operative banks have a very 

good recent record. in 1997 (after the split in the group) the number of members in the OP group was, 

0.6 million members; by 2010 it was 1.4 million members, having more than doubled in thirteen years. in 

2010 the POP group had around 0.1 million members, and between 1997-2010 its membership growth 

rates were very robust. 

26

 At least in the case of the OP Group, the growth has been sustained by a very 

26

  Similar developments have taken place elsewhere. For instance in the Dutch rabobank, the membership has increased from 0.5 

million members to 1.8 million members between 1999 and 2010 (Groeneveld 2011).

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Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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conscious policy of trying to gain competitive advantage through expanding membership. The main 

motivating factor has been economic incentives through patronage dividends. The attractiveness of the 

schemes has been increased throughout the 2000s by making the system financially more rewarding. 

Focusing on the years 2001-2005, Jones and Kalmi (2011) find that increases in membership ratios 

are associated with better bank performance. Their data also indicate that while the number of both 

members and customers has increased, the growth rate of membership has been much faster than the 

growth of customers, resulting in increases of membership ratio. On average the member to customer 

ratio increased from around 35% in 2001 to 39 % in 2005. Their findings, concerning a positive link 

between membership ratios and performance, differ from earlier literature on the subject that has claimed 

the relationship to be negative (Gorton and Schmid 1999; Leggett and Strand 2002). As such the Jones 

and Kalmi results are more promising than most findings contained in earlier literature concerning the 

sustainability of co-operative democracy. in total, we see both improvements and potential problems in the 

democratic development of Finnish co-operative banks. The broadening of membership has certainly made 

co-operative banks more democratic. At the same time, the trend towards centralization and increases of 

the average size of co-operatives may indicate potential problems in member democracy.

6. Discussion and Conclusions

Commenting on the literature on worker co-operatives up to the early 1990s, Bonin et al. (1993) 

noted that the literature had been theory-led and that empirical literature had lagged significantly behind. 

At the same time, it was apparent that theory building had often ignored many well-known stylized facts; 

early empirical studies often contained results that contradicted the most basic propositions of early theory. 

A similar observation might be made concerning the proposition that an inevitable conflict between 

democracy and scale economies allegedly exists.     

While a cursory look at the evidence might suggest support for this thesis, when we probe deeper into 

the meaning of as well as the reasons for such a conflict we find that the conceptual basis for the claim is 

not straightforward and often rests on shaky ground. Thus while individual co-operatives and groups of 

co-operatives face many challenges concerning democratic decision-making, the nature and scope of these 

challenges often varies across co-operative types. in some cases, such as “degeneration” in producer co-

operatives, it is clear that this is not necessarily an ineluctable process (or even a likely outcome.) in other 

instances, sometimes surprising outcomes can be expected-for example, group centralization may promote 

democracy at the local level.

Similarly diverse kinds of scale economies exist and they can be expected to have varying impacts 

for different co-operatives in different countries. While the range and quality of the available  empirical 

(econometric) evidence is patchy, to date this  does not lead to straightforward nor consistent support for 

the claim that economies of scale are always identifiable. Thus the clearest evidence of economies of scale 

within financial co-operatives is related to the US experience, whereas the evidence from elsewhere is more 

ambiguous. However, the existence of economies of scale is also dependent on regulation. For instance, Ferri 

and Pesce (2011) have argued that the increased compliance costs associated with new banking regulation 

generate artificial economies of scale that reduce the viability of small banking organizations. 

To provide more detailed institutional evidence on some of these matters, we review recent developments 

at two important co-operative cases. We note that individual Mondragon firms continue to be worker-

owned and governed while various mechanisms point to sustained solidarity within and integration of the 

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